134 posts categorized "Angels"

Wisconsin leaders support equality in angel investing

Really pleased to see that the Wisconsin LGBT Chamber of Commerce and the Greater Madison Chamber of Commerce are adocating for equality for same-sex couples in angel investing.

Here's a link to the press release. And here's a link to a letter they have written to a member of Congress from Wisconsin.

CaptureCKudos to Zach Brandon for his work on this. I got to know Zach from serving on a panel with him at the ACA Annual Summit a year or two ago. He is a leader in the angel community and it will be people like Zach, stepping up, that will eventually change consciousness on this issue. Right now, it's a sleeper. Few want to talk about it, but, the perverse reality is, the SEC rules for angel investing treat same-sex couples as second class.

Here's the rule change that the Wisconsin LGBT Chamber of Commerce and the Greater Madison Chamber of Commerce advocate, as does Startupequality.org:

A spouse of a natural person shall mean another person, regardless of gender or sexual orientation, whose relationship with the person specified: (1) may be characterized as such person's (i) husband, (ii) wife, (iii) spouse, (iv) domestic partner, or (v) designated beneficiary under any applicable state law for the purpose of ensuring that each person in a two-person relationship has certain rights or financial protections based upon such designation; or (2) is that of the other party to a civil union with such person.

Weekend Read: WSJ Accelerators Post on Pitch Events and General Solicitation

This weekend please read an article I wrote for The Accelerators blog of the Wall Street Journal, The Trojan Horse of Accredited-Investor Verification.

6960882500_cc7fccd4d4_oThe piece gets into how some angel groups, pitch event promoters, and demo day organizers are dealing with new Rule 506(c). Basically, the days of a de facto industry practice of ignoring the Rule 506 prohibition on general solicitation and general advertising are over.

Now that it is okay to generally solicit, it's also time to come to terms with what came part-and-parcel with such over permission: the need to take reasonable steps to verify the accredited status of all purchasers.

It's going to take some time for the ecosystem to sort things out.

Check out this Pando Daily post that Doug Cornelius quoted from in his weekly roundup post. Do you think the newly conservative steps demo days promoters are taking, as recounted by the Pando Daily reporter, Erin Griffith, cut the mustard?

Please do read the piece for the WSJ Accelerators!

Photo: D Services / Flickr.

Three longer reads for where we are after General Solicitation Day

We are now living in the second day after General Solicitation Day. All trying to take stock of what has happened, and how the landscape is different.

And there is no shortage of media coverage! (Here, from a news angle, is a good overview from the Wall Street Journal: General Solicitation Brings Startups Capital, Risks. I was interviewed for this article and love the quote they got from me: "The government is doubling down on the idea that accredited investors can fend for themselves.")

PhotoBut today I wanted to call out three different, longer-form pieces of writing, each published within the last week. Each, in a different way, lends a deeper perspective on where we in the startup financing ecosystem are now.

Each will be a reference piece in the weeks and months to come.

1. Paul Spinrad's take on where we are, how we got here, and how all the different pieces fit together.

Here is an article that Paul Spinrad published on a PBS website: Online Platforms Give the First Public Look at Private Equity. As I said on Twitter yesterday, Paul's is the best written, broadest article yet on general solicitation and the changes to private financing rules.

Among the delights of Paul's well written survey are: an explanation of how public offerings came to be squeezed into a private exemption framework; the balance or contrast of considerations when approaching policy for accredited and non-accredited crowdfunding; and how private equity platforms are rolling out new features to facilitate the new rule set.

On Monday in GeekWire, I tried, not very effectively, to point out some of the new features on some of the leading online platforms. Paul's take on the same topic is far more accomplished. And that topic is only one facet of his survey.

2. Trent Dykes', Megan Muir's and Kiran Lingam's whitepaper on do's and do not's at demo days and pitch events.

This one, Demo Days, Pitch Events and the New Reg D, is controversial. I've had an earful from several people already on how this whitepaper may get one or another thing wrong.

But I greatly admire the ambition and timeliness of it. The question that the rest of us hem and haw about – am I automatically generally soliciting if I show up at a demo day or pitch event? - they tackle.

Whether or not you agree with the protocols and checklists they lay out, Dykes, Muir and Lingam are calling out the right factors to consider and giving laypeople the means to educate themselves about general solicitation.

3. The Gunderson law firm's comment letter to the SEC on the proposed Reg D rules.

This is a letter published on the SEC's received comments page, signed by a Gunderson partner, Sean Caplice.

There are a ton of comment letters on the proposed rules, none too few from big law firms.

What's remarkable about the Gunderson letter is that it provides answers to all 101 "requests for comment" posed by the SEC in its proposing release.

Most commentators either cherry pick which of the SEC's questions they want to answer, or skip the agency's questions altogether and comment from the perspective of the commentators' own agenda or frames of reference. For tackling all 101 requests for comment, and for that reason alone, I think the Gunderson comment letter is a touchstone. (Kudos to Joe Wallin for pointing the letter out to me.)

Angel Capital Association guidance on accredited investor "verification"

Set aside, for the moment, the proposed rules that would impose pre-offering Form D filing requirements, information filing requirements, and other burdens that would make Rule 506(c) more of a burden than a benefit in the angel financing world.

It does seem likely that, come September 23, 506(c) will - at least for a time - go into effect as Congress intended it.

UntitledStartups and emerging companies will be able to "generally solicit" investors and such offerings will be exempt under Reg D, as long as all purchasers are (a) accredited, and (b) the companies raising the money take reasonable steps to verify that such purchasers are accredited.

Much of the discussion of what constitutes "verification" (this burden was imposed by Congress, not the SEC) defaults to certain non-exclusive, non-mandatory verification methods set out in the final rule establishing Rule 506(c). These methods are expensive, raise privacy problems, and are not practical for startups. The burden of following these methods is exacerbated at the seed stage.

But startups needn't despair.

Have a look at this guidance from the Angel Capital Association. See also this post from ACA Executive Director Marianne Hudson, with context and background.

In essence, the ACA is helping to educate the ecosystem regarding just how much an an issuer knows about a given purchaser, by virtue of that purchaser's membership in an "Established Angel Group." And that term is defined in the guidance.

Why is that important? Because the verification rule involves an assessment of the nature, amount and type of information that an issuer has about a given purchaser. It is a facts and circumstances test. The ACA guidance says, in effect, don't overlook facts that are staring you right in the face. Assuming, of course, that you are dealing with sophisticated angels, as outlined in the Established Angel Group definition.

Does this obviate the "reasonable steps" verification inquiry? Unfortunately, no, but it does give a startup a good start.

For 506(c) to work and amplify the power of angel investing, it's vital that seed stage startups not regard the verification requirement as the dead-end of general solicitation. It's going to take some work, some thought, some educating of lawyers, but the only way around is through.

Disclosure: a colleague and I were part of the team that helped ACA leadership develop the guidance.

Mitch Kapor's letter to the SEC

Great comment letter to the SEC from Mitch Kapor.

The subject is the proposal that the SEC has made to change Reg D and Form D, the rule set by which most startups raise money from angel investors.

5144089486_3a94a82b5c_zKapor is not the first prominent investor to pick up on the notion that the proposed rules will, if enacted as proposed, undercut, if not entirely moot, new Rule 506(c), which is a final rule (to go into effect later this month) and which implements the Congressional mandate and intent to make it easier for small businesses to raise private capital from angel investors.

Kapor distills many of the points already made by other prominent investors, namely Fred Wilson, Brad Feld and Naval Ravikant. And Kapor echoes a point frequently made by Angel Capital Association leaders such as Jean Peters, who in testimony to Congress spoke of how angel investing remains remarkably free of fraud and abuse.

But Kapor's letter is especially cogent on an aspect of this regulatory transition that is hard to talk about. If I try to identify what that aspect is, today I might say it has to do with how we aren't really going to be able to put the general solicitation toothpaste back into the tube.

But let's focus on the better way Kapor puts it in his comment letter. He's speaking here of how the information requirements proposed for 506(c) specifically, and the penalties for missing filing requirements under Rule 506 generally, will end up making general solicitation a booby-trap:

"Practices that have worked well without incident for decades could suddenly become unintentional minefields for honest startups and sophisticated investors alike. Demo days, where startups present to investors and press, will most certainly be called 'general solicitation' by the law firms advising startups (and likely by SEC enforcement as well). This means that some of the most high profile ways new startups raise money transparently may now cause those same startups to go out of business if the penalties are enforced."

I think Kapor is absolutely right about how lawyers are going to behave. They are going to tend to default toward telling clients to comply with 506(c), rather than rely on 506(b), if there's even a close call as to whether general solicitation might be afoot.

Why aren't lawyers, by and large, warning their clients away from demo days and pitch events today? I don't really know, but I share a sense with many of my lawyer friends that this passivity, or tacit acceptance, has settled into a de facto industry practice over the course of some years. New Rule 506(c) is in this sense a wake up call.

But the introduction of general solicitation needn't be a crisis.

We should stay focused on the fact that the SEC has, indeed, delivered general solicitation as Congress intended it. This fulfilled promise takes the form of the final rule which will go into effect on September 23. Come that day, new Rule 506(c) will be in effect - SEC Chair Mary Jo White has confirmed as much - and the new rule contains no pre-filing requirement, no information filing requirements, no draconian penalties for messing up filing requirements.

The only thing 506(c) demands from issuers, as the quid pro quo for permitting general solicitation, is that they verify the accredited investor status of each of the purchasers in a 506(c) deal. This, too, is not as big a deal as many people think (and to the extent you do think this is a big deal, your problem is with Congress and Title II of the JOBS Act, which mandated verification). There are ways verify under the new rule that don't require looking at W-2's or running credit checks on investors. See for example this excellent guidance from the ACA (disclosure: I was part of the team that helped ACA leadership develop the guidance).

Photo: Michael Lynch / Flickr.

The mission of startupequality.org

"StartupEquality.org has a simple mission," writes Dan Shapiro in an important guest post on TechCrunch. That mission "is to get same-sex couples the same rights to invest in startup companies as heterosexual couples."

CaptureOur "ask" of the SEC is to expressly acknowledge that persons in civil unions, domestic partnerships, or similar state law relationships, should have the same ability to pool resources, for purposes of satisfying accredited investor thresholds, as persons who are married.

Here's the rule Startupequality.org is proposing that the SEC adopt:

A spouse of a natural person shall mean another person, regardless of gender or sexual orientation, whose relationship with the person specified: (1) may be characterized as such person's (i) husband, (ii) wife, (iii) spouse, (iv) domestic partner, or (v) designated beneficiary under any applicable state law for the purpose of ensuring that each person in a two-person relationship has certain rights or financial protections based upon such designation; or (2) is that of the other party to a civil union with such person.

I encourage every member of the wac6.com community to read Dan's post and also consider weighing in on the comment thread developing there.

We didn't used to talk about discrimination against sexual orientation in the startup community. But now that we see how embedded it is in the enabling rule set, we have to confront it.

And the way to start is to acknowledge the inequity and to talk about it.

Congress not yet fully awake to the problems with the SEC's proposed overhaul of Reg D

A letter to the SEC from two Republican congresspersons is getting a lot of attention.

The subject is SEC proposed Reg D rules at odds with Congressional intent under the JOBS Act. This is a point I and others previously made in the press so it is good to see some members of Congress waking up. (From TechCrunch: Let’s Have General Solicitation As Congress Intended It.)

8355141_067c162acc_oBut it's disappointing, frankly, that the letter is so strident and partisan. Yet again we have to hear over and over how late the SEC was in adopting 506(c). (Get over it already Rep. McHenry and look forward!)

And it's difficult to credibly speak for Congressional intent when you get core features of your own legislation wrong. Example: the letter speaks of the lifting of the ban on general solicitation "for those Rule 506 offerings that solely target accredited investors." That is exactly the opposite of the policy choice actually made in the legislation. The greatest significance of the lifting of the ban on general solicitation is that you need not target. You can broadcast if you like. The point is to only allow as purchasers those persons for whom you have taken reasonable steps to verify accredited status.

Really, the SEC's proposed re-trading of Title II of the JOBS Act should not be a partisan issue. I would think that moderate Democrats and the White House would be equally interested in seeing 506(c) work and in 506(b) being protected. After all, the JOBS Act was actively supported by the Obama administration, and championed by the President himself.

And I imagine the SEC could probably use the political cover as state regulators will never be at peace with the democratization of angel investing. I am speculating here, but the agency could be more worried about hedge fund advertising then what a little incubated three-person startup raising $200,000 might do. The right policy choice might be to say yes to information requirements for hedge funds, no for operating issuers.

The consensus, non-partisan agenda should include, not just general solicitation, but also the angel platform exemption that Rep. McHenry originally introduced as a floor amendment, with express support from then Rep. Barney Frank. Congressional intent for that provision could not have been clearer. And yet an SEC staff FAQ threatens to compromise its utility.

My call to New Democrats, White House policy staffers, independents worried about depriving startups of a useful federal exemption: get together and own, by consensus, what the JOBS Act was supposed to do for angel investing.

Photo: Diane Hamilton / Flickr.

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